When you take care of someone, you are also taken care of! It’s like Karma. You do good, you get back good
in return. Ben and Stephanie had adopted a baby girl because they felt their family wasn’t complete otherwise.
This act of adopting children is not only a good and kind deed where another human being is benefiting from
your benevolence, but in doing so, you get assistance from Uncle Sam.

This week, we will discuss some of the tax benefits of taking advantage of the adoption credit opportunity. This
tax credit is taken in the year the child is awarded to you by the courts, as your adopted child, and the adoption
is final. Sometimes, you may pay for the adoption money early, last year, for example, but when you finalize
the adoption is when you get the tax credit.

Here are some points to consider for expenses used as an adoption credit:

All expenses used to adopt a child are given as a tax credit for up to the limit on IRS Tables

Adoptions before 2012 received a refundable tax credit. From 2013 through 2024, the credit was non-
refundable, meaning it could only reduce your tax liability to zero. Beginning with tax year 2025, up to $5,000 of
the adoption credit per eligible child is now refundable — meaning qualifying taxpayers may receive a refund
even if the credit exceeds their tax liability. Be sure to ask us about the current year’s rules. This is one tax
benefit that does NOT require you to keep receipts for the adoption expenses. Be sure to ask us about whether
you need to keep receipts or not for this benefit.

• Each dollar of tax credit may be equivalent to up to $3 of tax deduction

This is because a tax credit reduces your tax directly, while a tax deduction only reduces the income
that is taxed, but the true benefit depends on your tax bracket.

• The credit starts to phase out when your household income exceeds certain IRS limits

The IRS publishes the income phase-out for this limit. Ask us what the phase-out limit is for this year.

• Employers can also pay for adoption expenses and receive a tax credit of the same amount as
  individuals

Self-employed individuals may claim a tax credit through their C-Corporation, but owners of S-
Corporations claim the credit on their personal returns.

• For adoptions finalized in 2020 and later, each parent may distribute (Penalty Free) up to $5,000
  from retirement accounts

This is part of the SECURE Act, which allows each parent to take up to $5,000 penalty-free from
retirement accounts within one year of a qualifying adoption. Note that while the 10% early withdrawal
penalty does not apply, the distribution is still subject to regular income tax. Both parents may each
take up to $5,000 for the same child’s adoption, and the distribution may also be repaid to the
retirement account at a later date.

• Special needs children qualify for even bigger tax credits

Be sure you understand the “special needs” description. It is wider in scope than you think. For
instance, abused (defined more than just sexually for this tax benefit) children may qualify as special
needs.

Call today, don’t delay! See how this affects you. We can be reached at 602-264-9331 and on all social media under azmoneyguy.

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